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The inclusion of aviation in the European Union Emissions Trading Scheme

The European Parliament and Council of the European Union resolved in 2008 to expand the European Union Emissions Trading Scheme (EU ETS) to include the “aviation activities” from the aviation sector. This represents a significant expansion of the EU ETS and also a significant new obligation for the international aviation industry.

Both EU and non-EU aircraft operators will be required to comply with the scheme to the extent that their aircraft fly within, into or out of the EU. Whilst there are certain de minimis provisions excluding small operators, and providing exemptions for certain military and other activities, the majority of commercial aircraft operators flying into and out of the EU will be obliged to comply with the scheme.

Key points for consideration

The primary obligations on aircraft operators subject to the EU ETS will be to:

submit for approval an initial monitoring and reporting plan to the relevant Member State

monitor annual CO2 emissions and fuel burn for flights within, in and out of the EU and submit annual emissions reports to the relevant Member State

in April of each year, commencing in 2013, surrender carbon allowances equal to the aircraft operator’s total CO2 emissions for flights within, into and out of the EU for the preceding calendar year.

Outcome

The EU ETS imposes a carbon liability on aircraft landing into the EU, in respect of their emissions within EU airspace and also outside EU airspace (e.g. for flights from Singapore to London, emissions liability would be calculated based on fuel burn from departure from Singapore). This ‘extra-territorial’ effect of the EU ETS has generated criticism by some industry stakeholders and is the subject of a current class action in the European Court of Justice. The class action was commenced by several American operators and seeks to challenge the lawfulness of the extra-territorial effect of the EU ETS on international aviation. It is likely that the hearing will take place within the next six to 12 months.

EU ETS: aviation activities

The European Parliament and Council of the European Union resolved in 2008 to expand the European Union Emissions Trading Scheme (EU ETS) to include the “aviation activities” from the aviation sector. This represents a significant expansion of the EU ETS and also a significant new obligation for the international aviation industry.

From 2012, aircraft operators will need to surrender one carbon allowance per tonne of C02 emitted on all flights within and to and from the EU.

Both EU and non-EU aircraft operators will be required to comply with the scheme to the extent that their aircraft fly within, into or out of the EU. Whilst there are certain de minimis provisions excluding small operators, and providing exemptions for certain military and other activities, the majority of commercial aircraft operators flying into and out of the EU will be obliged to comply with the scheme.

The inclusion of aviation activities in the EU ETS poses a significant challenge to aircraft operators in terms of increased regulatory compliance and also in terms of increased operational costs.

The underlying premise of the EU ETS is that emissions from energy intensive industries are capped at a limit below the “business as usual” level. Installations currently covered by the EU ETS include activities in the energy sector, iron and steel production and processing, the mineral industry and wood pulp, paper and board industry and emitting the specific greenhouse gases associated with that activity.

Each aircraft operator subject to the EU ETS has been assigned to a specific Member State and will need to comply with the Member State’s domestic implementing legislation and regulatory requirements. However some of the EU Member States are yet to implement the relevant domestic legislation.

The primary obligations on aircraft operators subject to the EU ETS will be to:

submit for approval an initial monitoring and reporting plan to the relevant Member State

monitor annual CO2 emissions and fuel burn for flights within, in and out of the EU and submit annual emissions reports to the relevant Member State, and

in April of each year, commencing in 2013, surrender carbon allowances equal to the aircraft operator’s total CO2 emissions for flights within, into and out of the EU for the preceding calendar year.

Free allowances

The EU ETS will cap the amount of free emissions available to airline operators in 2012 at 97 per cent of the average aviation emissions level for 2004 to 2006 (as determined by the EU). In 2013 and through to 2020, this amount will be reduced to 95 per cent.

Of the total available free allowance, 85 per cent will be issued free of charge to the aircraft operators between 2012 and 2020. The remaining 15 per cent will be auctioned and a special reserve (equating to three percent of the total quantity of allowances) created for those operators who are new to the EU ETS or can be classified as “rapidly growing”.

As the amount of available free allowances from 2013 will be based on 95 per cent of the 2004 to 2006 emission levels, it is expected that there will be an insufficient number of free allowances available to aircraft operators to cover their full carbon liability under business as usual operations. Aircraft operators who emit in excess of their allocation of free allowances will need to either reduce emissions and or purchase additional carbon units on the open market.

Penalties and the industry response

The EU ETS contains significant penalties for non-compliance with the EU ETS, including a financial penalty of €100 per tonne of CO2 emitted for which an allowance was not surrendered. The EU ETS also contains provisions enabling aircraft seizure and re-sale in certain circumstances.

The EU ETS imposes a carbon liability on aircraft landing into the EU, in respect of their emissions within EU airspace and also outside EU airspace (e.g. for flights from Singapore to London, emissions liability would be calculated based on fuel burn from departure from Singapore). This ‘extra-territorial’ effect of the EU ETS has generated criticism by some industry stakeholders and is the subject of a current class action in the European Court of Justice. The class action was commenced by several American operators and seeks to challenge the lawfulness of the extra-territorial effect of the EU ETS on international aviation. It is likely that the hearing will take place within the next six to 12 months.

While some stakeholders applaud the EU on taking a leading role in international aviation emission regulation, others argue that aviation emissions should be regulated at the global level. With the development of separate emissions trading schemes in several countries, there is likely to be continued international dialogue on the importance of global regulation and coordination.